Koufu Group - UOB Kay Hian 2020-08-14: 1H20 Slightly Below Expectations; Gradual Sales Recovery & Grants To Support 2H20 Earnings


Koufu Group - 1H20 Slightly Below Expectations; Gradual Sales Recovery & Grants To Support 2H20 Earnings

  • Koufu’s 1H20 net profit declined by 82% y-o-y to S$2.5m, slightly below our expectations, partly due to higher impairment of PPE of S$1.0m in 1H20. Revenue declined by 23% y-o-y due to the impact of the Circuit Breaker measures and lower contribution from Macau due to travel restrictions.
  • Going into 2H20, we do expect a significant q-o-q improvement in earnings, led by gradual sales recovery, especially in heartland areas and additional government grants.
  • Maintain BUY. Target: S$0.78.

Koufu's 1H20 Results

Results slightly below expectations.

  • Koufu (SGX:VL6) reported 1H20 net profit of S$2.5m (-82% y-o-y). See Koufu's announcements. Although we do expect a stronger 2H20, 1H20 results were below our expectations, accounting for 12% of our and consensus’ full-year forecast, partly due to higher-than-expected other operating cost from impairment of PPE.

Revenue declined amid Circuit Breaker measures in Singapore and travel restrictions in Macau.

  • Revenue from the outlet and mall management segment declined 19.4% y-o-y in 1H20 largely due to:
    1. a S$5.2m decrease in variable rent income as footfall reduced, and
    2. S$2.5m lower fixed income as rental rebates was passed down.
  • Revenue from food and beverage declined by a greater extent to S$56.6m (-41.2% y-o-y) in 1H20 due to:
    1. lower footfall at most outlets during the Circuit Breaker and phase 1, as dine-in services were disallowed, and
    2. temporary suspension of operations of 10 food courts, three quick-service restaurants (QSR), two full-service restaurants, and 26 R&B tea kiosks/QSR during the same period.
  • On a geographical basis, operations in Macau, which are reliant on tourist arrivals, were more heavily impacted, recording a 49.5% decline in revenue to S$5m in 1H20 compared with the 20.7% y-o-y fall in revenue from Singapore operations.

Revenue decline exacerbated by fixed costs but partially mitigated by grants.

  • Staff cost and rental expense was 12.1% y-o-y and 27.7% y-o-y lower respectively in 1H20. The group also received S$5m worth of grants in 1H20. However, these were insufficient to offset the fall in revenue, S$0.9m higher impairment of plant, property and equipment (PPE) and higher depreciation of PPE (+3.3% y-o-y) in 1H20.

Gradual recovery in Singapore, particularly in heartland areas.

  • Since the phase 2 reopening of the economy, management shared that the footfall and revenue in heartland areas (50-60% of revenue) have seen significant improvements post resumption of dine-in services. However, food courts located near offices, downtown areas, tertiary institutions as well as tourist hot-spots have remained low as certain companies continue to implement work from home (WFH) measures and travel restrictions remain in place.

Macau update.

  • The regular operational hours of the Hongkong-Zhuhai-Macau bridge and Portos do Cerco border have resumed since early May 20. Furthermore, the 14-day quarantine policy on all visitors crossing the Macau-Guangdong borders has been lifted in Jul 20. Although the individual visitor scheme (IVS) for all Chinese provinces has not resumed and remains uncertain, Macau’s secretary for Social Affairs and Culture said the city is working with mainland authorities to resume the full visa programme.

Additional grants in 2H20.

  • Koufu received S$5.5m worth of grants in 1H20, mainly from the Jobs Support Scheme (JSS) and property tax rebates passed down by landlords. We expect the group to receive additional grants worth approximately S$5m in 2H20 as companies are expected to receive the second and third JSS payout in Jul and Oct 20.

New outlet openings in Singapore and Macau.

  • The opening of the Le Quest food court has been delayed to 4Q20. The group expects also to open one QSR at Canberra Plaza and three new R&B Tea kiosks in 3Q-4Q20. Its new Nova City outlet in Macau is scheduled to open this month. The group is also looking to expand the network of retail kiosk under the newly acquired Dough Culture brand.

Strong cash position.

  • Koufu’s cash generation ability has helped it build a significant net cash of S$72m as at end-1H20, equivalent to 19% of its market capitalisation.


  • We lower our 2020 earnings by 17.4% to reflect the lower-than-expected results in 1H20 mainly as we adjust our other operating costs, which include a S$1m increase in asset impairment and admin expense upwards, while keeping revenue largely unchanged.
  • With additional government grants and footfall recovery in heartland areas, we do expect a meaningful q-o-q recovery but also expect 2H20 earnings to decline by 7.6% y-o-y due to travel restrictions, WFH measures and lower seat capacity. For 2021-22, we make no changes to our earnings estimates.

Koufu - Valuation & Recommendation

Joohijit Kaur UOB Kay Hian Research | John Cheong UOB Kay Hian | https://research.uobkayhian.com/ 2020-08-14
SGX Stock Analyst Report BUY MAINTAIN BUY 0.78 UP 0.690